Econ Ch. 10

In which of the following situations is adverse selection /not/ a concern? a. A company offers employees the opportunity to purchase group health insurance. b. A company requires employees to purchase group health insurance. c. The health insurance plan doesn't include dental care.

A company requires employees to purchase group health insurance.

Which of the following situations is likely to involve adverse selection? a. After receiving an emergency call during class, a professor leaves students unsupervised for the rest of the period. b. A course has a reputation for being an easy A, even though after the term begins, students realize that it isn't. c. A course is a requirement for physics majors but an elective for biology majors.

A course has a reputation for being an easy A, even though after the term begins, students realize that it isn't.

In college admissions, which of the following are examples of statistical discrimination? a. A college has minimum required scores on standardized tests. b. A college is an all-women's school. c. A college uses high school GPA to rank students for scholarship offers. d. A college requires three letters of recommendation.

A, C

Advertising often features testimonials from satisfied customers who happily describe the characteristics of the goods or services they received. Which of the following are reasons why advertisers use this technique rather than a direct description of the goods or services? a. People assume that the opinions of other customers are more reliable than what the seller would say about the product. b. Most first time buyers of a product will intuitively perceive the actual seller as an adversary. c. The seller's willingness to let actual customers speak for them shows the seller's confidence in this product to new customers. d. Other customers have less or no incentive to say that a product or service is great if it is not.

A, C, D

Consider the college admissions process. Which of the following are examples of signaling? a. The admissions committee sends applicants an invitation to visit the college campus for a tour. b. The admissions committee checks an applicant's high school grades and test scores for minimum standards. c. An applicant visits the college campus before deciding whether to attend college there. d. An applicant highlights her participation on the high school debate team and her awards in track.

A, D

Some people argued that the initial mandate for health insurance coverage could reduce health care costs, stating that it would address the problem of: adverse selection information asymmetry moral hazard statistical discrimination

Adverse selection

Which of the following situations is likely to involve moral hazard? a. A course is a requirement for physics majors but an elective for biology majors. b. After receiving an emergency call during class, a professor leaves students unsupervised for the rest of the period. c. A course has a reputation for being an easy A, even though after the term begins, students realize that it isn't.

After receiving an emergency call during class, a professor leaves students unsupervised for the rest of the period.

Consider the college admissions process. Which of the following are examples of screening? a. An applicant highlights her participation on the high school debate team and her awards in track. b. The admissions committee checks an applicant's high school grades and test scores for minimum standards. c. The admissions committee sends applicants an invitation to visit the college campus for a tour. d. An applicant visits the college campus before deciding whether to attend college there.

B, D

In which of the following situations is an information asymmetry likely to cause problems? a. Cab drivers know the shortest route to any destination better than their passengers do. b. Managers can't always supervise members of their sales staff, who work on commission. (That is, staff members receive a percentage of the total value of the sales they make.)

Cab drivers know the shortest route to any destination better than their passengers do.

Consider the market for life insurance. Which of the following is not an example of statistical discrimination an insurer might use to set premiums? a. Charge a higher premium for someone who smokes compared to someone who does not. b. Charge a higher premium for men than for women because life expectancy is shorter for men. c. Charge a higher premium for someone who has been diagnosed with a terminal disease. d. Charge a higher premium for elderly people than for young adults.

Charge a higher premium for someone who has been diagnosed with a terminal disease.

In which of the following government policies is moral hazard /not/ a concern? a. Government requires hospitals to treat anyone who comes to the emergency room, regardless of insurance status. b. Government provides unemployment insurance when workers are laid off. c. Government raises taxes to pay for social services. d. Government provides disaster relief for homeowners who lose their homes in a flood

Government raises taxes to pay for social services.

Suppose the government is thinking of requiring pharmaceutical companies to print the exact chemical formulas of medications on the label so consumers will know exactly what they are ingesting. Is the new disclosure rule likely to benefit the average consumer? a. No, as the average consumer most likely lacks the knowledge needed to understand the chemical formulas printed on a label. b. Yes, because the average consumer can now do their own extensive research on all the active ingredients in their medication. c. No, doctors always require their patients to take the medication prescribed, therefore any information on chemical formulas is completely irrelevant to consumers. d. Yes, because the average consumer needs more information about the risk of a product, such as what side effects they may experience.

No, as the average consumer most likely lacks the knowledge needed to understand the chemical formulas printed on a label.

In which of the following situations is an information asymmetry likely to cause problems? a. People who book hotel rooms online know less about the quality of the room they are reserving than the hotel's management. b. Parents know more than their children about how to write a good college application.

People who book hotel rooms online know less about the quality of the room they are reserving than the hotel's management.

Return to the description of the student loan program that opened the chapter. Suppose that all students at the university are perfectly altruistic and share the university's goal of reducing debt for graduates with low incomes. Information asymmetry _______ cause a problem in this situation because: a. the students can use their information advantage strategically to achieve their goals at the expense of the university's goal. b. both the university and the students have the same information. c. the university can use its information advantage strategically to achieve its goals at the expense of the students' goals. d. students and the university share the same goal, and having the advantage of more information is not important.

Students and the university share the same goal, and having the advantage of more information is not important.

Suppose you are in the market to purchase your first home. You found a house you like in your price range and are buying directly from the previous owner. Which of the following is not an example of an information asymmetry in this situation? a. Only the buyer knows how much she or he values the house and therefore the highest amount that she or he is willing to pay. b. Only the seller knows the minimum amount that she or he is willing to accept to get the house sold. c. The buyer will know better what the true market value is for the house as she or he has access to information on what similar houses are selling for. d. The seller will know more about any issues with the house, such as problems with the pipes, wiring, or foundation.

The buyer will know better what the true market value is for the house as she or he has access to information on what similar houses are selling for.

A course description posted during the registration period notes that homework is graded complete or incomplete rather than being corrected by the instructor. Which of the following describes the adverse-selection problem in this situation? a. While informative, the description still fails to give prospective students complete information on type of homework given. b. The description is likely to give potential students the false belief that the assignments will be easy when they may still receive low grades on their assignments. c. The description will disproportionately attract high performing students with a genuine love of learning. d. The description will disproportionately attract students who don't typically perform well on graded assignments.

The description will disproportionately attract students who don't typically perform well on graded assignments.

A club charges a flat fee for an open bar (all-you-can-drink). Which of the following describes the adverse-selection problem? a. The club will be too crowded for customers to have a good time. b. The flat fee attracts mostly heavy drinkers. c. The club will not have a very good balance between male and female customers. d. The flat fee attracts mostly light drinkers.

The flat fee attracts mostly heavy drinkers.

Consider the market for auto insurance. Insurers will gain some useful information about the riskiness of student drivers by enquiring about their academic grades. True or False

True

Joining a fraternity or sorority might include elaborate or difficult rituals. These rituals are examples of both signaling and screening. True or False

True

Jane uses an online dating service. For each of the following activities say whether Jane is screening or signaling. a. Jane views profiles of only non-smokers: b. Jane describes her volunteer activities in her profile: c. Jane lists museums and foreign films among her interests: d. Jane looks for matches who live within 25 miles of her address:

a. Signaling b. Screening c. Screening d. Signaling

Say whether each of the following situations involves screening or signaling. a. Auto shops and motels advertise that they are AAA-approved: b. Employers check interviewees' Facebook or LinkedIn profiles before hiring one of them: c. Applicants must pass an exam before becoming eligible for a civil-service position: d. People wear expensive clothing with large brand names or logos:

a. Signaling b. Screening c. Screening d. Signaling